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FX talkING January 2018

1

FX talkING In EUR we trust

An early January sell-off in core bond markets has yet to do much damage to

core trends in FX markets – namely those of seeking out and investing in growth

opportunities outside of the US. The mid-cycle story of strong growth and benign

inflation trends overseas will keep equities supported and the dollar pressured.

EUR/USD continues to perform well and the story here is of timing the next leg higher.

We prefer March for the rally – once the Italian political scene becomes clearer and

when the ECB considers withdrawing the threat of further QE. This cross seems relatively

immune to an orderly rise in US rates. The EUR also stacks up as a safe-haven currency

should President Trump choose to pursue greater protectionism later this month.

The broad decline in USD/Asia is especially worth highlighting. One interpretation of the

PBOC’s decision to liberalise the CNY fixing is of a PBOC confident that the dollar is going

to decline. We see certain parallels now with the broad decline in USD/ASIA 2005-2007.

Growing Asia FX reserves could also be re-cycled into the EUR – a key factor at the time.

In Europe, a few currencies may out-pace EUR strength (SEK, CZK), but most should be

carried along for the ride against the softer dollar. Of the EMEA high yielders, RUB and

perhaps TRY would be our preference here, but too little risk is now priced into ZAR.

The commodity rally is helping LATAM currencies in general. Yet political pitfalls certainly

lie ahead in both Brazil and Mexico. We would not chase rallies here.

ING FX forecasts

EUR/USD USD/JPY GBP/USD

1M 1.20 113 1.36

3M 1.23 113 1.40

6M 1.25 111 1.42

12M 1.30 110 1.53

EUR/GBP EUR/CZK EUR/PLN

1M 0.88 25.40 4.18

3M 0.88 25.20 4.15

6M 0.88 25.00 4.14

12M 0.85 24.80 4.12

USD/CNY USD/MXN USD/BRL

1M 6.45 19.30 3.25

3M 6.40 19.60 3.30

6M 6.35 20.50 3.45

12M 6.30 18.80 3.25

> / = / < indicates our forecast for the currency pair is above/in line with/below the corresponding market forward

or NDF outright

Source: Bloomberg, ING

FX performance

EUR/USD USD/JPY EUR/GBP EUR/NOK NZD/USD USD/CAD

%MoM 2.8 -1.5 0.7 -1.6 4.7 -2.3

%YoY 14.6 -3.7 1.8 6.6 2.8 -5.1

USD/UAH USD/KZT USD/BRL USD/ARS USD/CNY USD/TRY

%MoM 4.6 -1.5 -2.3 7.9 -2.2 -2.6

%YoY 4.8 -0.9 0.5 18.0 -6.5 -0.9


Chris Turner Head of Foreign Exchange Strategy

London +44 20 7767 1610

[email protected]

Petr Krpata, CFA Chief EMEA FX and IR Strategist

London +44 20 7767 6561

[email protected]

Viraj Patel Foreign Exchange Strategy

London +44 20 7767 6405

[email protected]

View all our research on Bloomberg at

ING5<GO>

USD/Majors (30 Jan 09=100)

Source: Reuters, ING

USD/EM (30 Jan 09=100)

Source: Reuters, ING

90

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GBP

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$/TRY

$/BRL

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StrongerEM FX

FX Strategy

Economic & Financial Analysis

12 January 2018

FX

ING.com/THINK


2

Developed markets

EUR/USD

Staying strong Current spot: 1.21

EUR/USD continues to hold up well despite the rise in US rates. A

25bp Fed hike in March is 80% priced now. We have a slight

preference for June given core inflation remains below 2% and

the change of Fed Chair in February. A faster rise in inflation

would see us favour March. Thereafter we favour 2 more hikes.

Minutes of the December ECB meeting also suggest there could

be room for movement in ECB language after all. A withdrawal of

the threat to increase QE could be seen in March – as could a safe

outcome to Italian elections on 4 March.

Bear trend in $/Asia re-introduces EUR demand from Asian CBs.

Intervention to buy USD is re-cycled into EUR, similar to 2005-07. Source: Bloomberg, ING

ING forecasts (mkt fwd) 1M 1.20 (1.216) 3M 1.23 (1.2211.23) 6M 1.25 (1.229) 12M 1.30 (1.246)

Chris Turner, London +44 20 7767 1610

USD/JPY

Trump’s playground Current spot: 111.40

Our team have had a good call with the rise in US Treasury yields

– but $/JPY has struggled to rally. One of the stories in early

January has been the BoJ’s decision to slow purchases of longer-

dated JGBs. We prefer to see this as a decision to try and steepen

the JGB curve for the local asset management industry rather

than a pre-emptive BoJ move to normalise policy. The latter may

not be a story until October 18, if at all.

Instead it seems that Trump’s threat to impose broad-based

sanctions on China (we may hear more of this end Jan at

Davos/State of Union) may be playing a role here.

At present, we’re sticking to a 110-115 range, with downside risks Source: Bloomberg, ING

ING forecasts (mkt fwd) 1M 113.00 (111.2) 3M 113.00 (110.8) 6M 111.00 (110.2) 12M 110.00 (108.8)


GBP/USD

Conviction call for a rally to 1.40 in 1Q18 on Brexit progress Current spot: 1.37

‘Less Noise, More Poise’ is our GBP 2018 motto and its resilience in

recent weeks somewhat encapsulates this sentiment. We see 2

factors dictating the pound’s narrative in the short-term: (1) UK

politics and (2) the Bank of England’s policy path.

On the first, we believe noise around a fragile Tory government

may act as a limiting factor for the currency – but note that the

bar to actively sell GBP on UK politics is high. While speculative

investors have turned net long in recent months, this adjustment

in positioning has been mainly driven by GBP shorts bailing.

Our conviction call is for GBP/USD to rally to 1.40 in 1Q18 on an

agreed Brexit transition deal and hawkish BoE policy re-pricing. Source: Bloomberg, ING


Viraj Patel, London +44 20 7767 6405

0.90

1.00

1.10

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1.60

0.90

1.00

1.10

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Jan10 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18 Jan19

ING f'cast Mkt Fwds

70

80

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100

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130

70

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130


ING f'cast Mkt Fwds

1.10

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1.70

1.80

1.10

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ING f'cast Mkt Fwds


3

EUR/JPY

The ‘Trump put’ on equity markets keeps downside limited Current spot: 135.3

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110

130

150

90

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150


ING f'cast Mkt Fwds

EUR/JPY is making slow, but steady progress to the upside. Seen

as a key proxy for equity risk, EUR/JPY will suffer occasional

wobbles. Yet we think it is too early to call a top in equities – after

all we’ve only just entered a bear market in bonds – a bear

market in equities may not follow for a year or two.

President Trump also has a keen interest in keeping equities

elevated – as a testament to his successful Presidency. We doubt

he would pursue a protectionist agenda aggressively enough

were it to start dragging US equity markets lower.

We’ve been positive on EUR/JPY for a long time now – and expect

further gains, most likely in March, led by a stronger EUR. Source: Bloomberg, ING

ING forecasts (mkt fwd) 1M 137.00 (135) 3M 138.00 (135) 6M 141.00 (135) 12M 143.00 (136)


EUR/GBP

EUR/GBP stability is the name of the game for 2018 Current spot: 0.89

Progress during Phase II of Brexit negotiations – and subsequent

clarity over the UK’s new macroeconomic and trading paradigm –

will be the overarching theme dominating EUR/GBP’s direction of

travel in 2018. Despite a long, tricky road – we expect eventual

progress and steps towards a mutual agreement will see some of

GBP’s long-run Brexit risk premium priced out (EUR/GBP to 0.85).

Ahead of this, much of the year will be spent with two cyclical

forces – in the form of a positive Eurozone economic story and

less pessimistic UK economic story – offsetting each other. This

points to range-bound price action in the broad 0.85-0.90 range.

Risks skewed to a move below 0.85 on the back of a ‘softer’ Brexit. Source: Bloomberg, ING



EUR/CHF

Wind at the SNB’s back Current spot: 1.18

The SNB are welcoming the depreciation in the CHF and continue

to describe it as ‘highly valued’. Super-loose SNB monetary policy

looks to remain in place all year – where the SNB can always

point to low inflation (CPI forecast at 0.8% YoY end-2018) to

justify their actions. At the same time, Swiss growth at 2% should

continue to underperform that of the Eurozone. Wider rate

spreads and a higher EUR/CHF is certainly part of the game-plan.

Italian elections on 4 March could help determine EUR/CHF

direction this summer. We only attach a 5-10% chance to a clean

negative EUR outcome. More likely is a neutral grand coalition.

ECB normalisation discussion this summer the catalyst for 1.25. Source: Bloomberg, ING



0.65

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0.75

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0.85

0.90

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0.65

0.70

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ING f'cast Mkt Fwds

0.90

1.00

1.10

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1.30

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1.60

0.90

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1.10

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ING f'cast Mkt Fwds


4

EUR/NOK

The pace of NOK gains to slow as oil is hitting US$70/bbl Current spot: 9.66

7.0

7.5

8.0

8.5

9.0

9.5

10.0

7.0

7.5

8.0

8.5

9.0

9.5

10.0


ING f'cast Mkt Fwds

The ongoing rise in oil prices is benefiting NOK both via the

improved economic and monetary policy channels.

The Norges Bank already brought the timing of the first expected

rate hike forward to 1Q19. Should oil prices stay elevated, the NB

may bring the hike into 4Q18. Yet, we see this as a risk given our

commodity’s team base case of stabilising / somewhat declining

oil prices. It suggests the pace of NOK gains should slow, with the

100-day MA of EUR/NOK 9.55 acting as a strong support.

The positive effect on NOK from higher prices and the less dovish

NB is further exaggerated by the cheap krone valuation (11%

cheap against EUR based on our medium-term BEER model). Source: Bloomberg, ING


Petr Krpata, London +44 20 7767 6561

EUR/SEK

Front-loaded SEK strength under way Current spot: 9.84

8.0

8.5

9.0

9.5

10.0

10.5

8.0

8.5

9.0

9.5

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ING f'cast Mkt Fwds

We look for the 1Q18 frontloaded SEK strength to continue and

EUR/SEK to move lower, potentially towards 9.60. The Stibor

market has already normalised, the Riksbank is modestly less

dovish than market feared and the concerns about the housing

market are easing too (following the better-than-expected data).

However, given that the Riksbank is unlikely to materially and

aggressively front-run the ECB, we don’t expect the current

theme of the market re-pricing the Riksbank outlook to last. This

suggests the SEK upside should stall from 2Q18 onwards (due in

part to the Riksbank’s unwillingness to induce overly strong SEK).

We thus expect EUR/SEK to flat line after the 1Q18 decline,

trading around 9.50-9.60 levels for the remainder of the year. Source: Bloomberg, ING



EUR/DKK

The DN likely to be happy with the gradual DKK weakness Current spot: 7.450

7.42

7.43

7.44

7.45

7.46

7.47

7.48

7.42

7.43

7.44

7.45

7.46

7.47

7.48


ING f'cast Mkt Fwds

EUR/DKK is pushing higher, reaching the highest level since May

2017 as EUR continues strengthening (induced by a mix of ECB

Minutes and the tentative progress on German coalition talks).

With the EUR/DKK (currently at 7.4485) still below the central rate

of 7.46038, there is no need for the DN to react. In fact, the

central bank is likely to welcome the move higher. However we

see a risk of EUR/DKK moving back to 7.4400 in coming weeks

ahead of the March Italian elections.

The DN is likely to keep its depo rate in deeply negative territory

and only start normalising its policy once the ECB embarks on

depo rate hikes. This should be only a story for 2018. Source: Bloomberg, ING




5

USD/CAD

NAFTA risks a sting in the tail to a bullish CAD story Current spot: 1.251

0.90

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ING f'cast Mkt Fwds

CAD has been on fine form of late – not least due to external

factors such as the resilience in oil prices (including a rebound in

Western Canada Select crude) and a benign global environment

that has favoured high-beta currencies. Canadian macro data

has also been promising over the past month – with a sharp pick-

up in core CPI and healthy jobs numbers making the case for a

BoC rate hike in the upcoming 17 January meeting highly likely.

NAFTA noise – and growing risks of a break-up (albeit not ING’s

base case) – is the only headwind for the CAD in the near-term.

The fallout for CAD would be significant if we saw a NAFTA break-

up. In this tail-risk scenario, USD/CAD could move higher to 1.30. Source: Bloomberg, ING



AUD/USD

AUD support from rising iron ore prices may fade in 1Q18 Current spot: 0.79

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ING f'cast Mkt Fwds

With the USD trading under new rules – and in an environment

where rising US yields do not necessarily have to weigh on carry

currencies – AUD/USD has marched higher. On reflection, we may

have overestimated the channel via which higher long-dated US

yields could weigh on AUD/USD. Our 1M forecast is now 0.78.

The strong start to the year for industrial metals has also helped

the AUD to rally. Our commodities team believe the rally in the

iron ore looks overdone – and expect a decline to US$55/tonne in

2Q18. This could weigh on AUD sentiment (more on the crosses).

Still, with the Australian economy stuck in ‘lowflation’ mode – we

expect the RBA to be one of the last of the G10 central banks to

hike. This should limit the degree of AUD upside over 2018. Source: Bloomberg, ING



NZD/USD

Benign risk backdrop + positive local story = stronger NZD Current spot: 0.72

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ING f'cast Mkt Fwds

While a weak $ environment partly explains the extensive rally in

NZD/USD beyond 0.72, one cannot neglect the positive local story

that is starting to transpire. Lower political/policy risks, resilience

in the New Zealand economy and signs of a bottoming out in

dairy prices – all spell good news for the kiwi in the near term.

Though the policy uncertainty of a Labour-NZ First coalition led to

a NZD sell-off in 2017, the currency has since stabilised as we had

expected – with the dust settling on the new government. Also,

the appointment of a new RBNZ governor – the well-respected

Adrian Orr – has taken a large chunk of uncertainty off the table.

We revise our 1M and 3M forecasts for NZD/USD to 0.72 and 0.74. Source: Bloomberg, ING




6

Emerging markets

EUR/PLN

Strong GDP and dovish MPC, but MinFin helped PLN Current spot: 4.17

3.75

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4.25

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3.75

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4.50

4.75


ING f'cast Mkt Fwds

EUR/PLN fell to 4.15, pushed by the MoF converting EU funds on the

market in 4Q17 and higher €/US$ recently. The short-term outlook

for the zloty is mixed. PLN is close to overvalued vs EUR according to

our s-t model, positioning is already high in PLN and MPC extended

its dovish forward guidance - we moved first hike to 2019 instead of

4Q18. EUR/PLN is seen back closer to 4.20 in coming weeks.

Appreciation of the PLN is expected to resume later in 1Q18,

reflecting the strong domestic macro story. Risks stemming from

the stand-off against the EU are mostly long term (negotiation of

the next EU budget), so are out of scope for now. All-in-all

EUR/PLN is expected to remain below 4.20 in 2018 on average. Source: Bloomberg, ING


Rafal Benecki, Warsaw +48 22 820 4696

EUR/HUF

Déja vu all over again with EUR/HUF around 310 Current spot: 308.6

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ING f'cast Mkt Fwds

We expect HUF to trade on the soft side going into the first NBH

IRS tenders and the start of the mortgage bond QE in January.

Yet, the experience of 2H16 and 2017 (when NBH pushed HUF2tr

out of the 3-m depo facility) suggests that the new excess

liquidity does not tend to weigh on HUF meaningfully.

The above suggests limited HUF weakness, with EUR/HUF likely

trading around 310 over the coming weeks/months.

Thereafter, look for a back-loaded HUF strength in 2H18 once (a)

we pass the April Parliamentary elections; (b) the mortgage bond

QE programme will be nearing the end. Expect EUR/HUF to start

testing the 300 level in late 2018. Source: Bloomberg, ING


Petr Krpata, London +44 20 7767 6561, Péter Virovácz, Budapest +36 1 235 8757

EUR/CZK

Stronger CZK still, yet a slower pace of appreciation Current spot: 25.52

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25

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28

29

23

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ING f'cast Mkt Fwds

The CNB decided not to distort the Christmas festive period and

kept rates on hold in December. However, Governor Rusnok

indicated that a gradual tightening is still ahead. We expect a

rate hike in February during the Inflation Report meeting.

Despite slightly weaker inflation in December (2.4% YoY), we look

for a gradual hiking cycle in coming quarters due to favourable

economic conditions and accelerating wages (ie, 3-4 hikes).

As the market is pricing almost three full 25bp hikes this year and

80% prob of a Feb hike, the pace of CZK appreciation should slow.

Yet still, EUR/CZK is to break 25.00 this year. With EUR/USD

expected to strengthen, USD/CZK is to move very close to 19.00. Source: Bloomberg, ING


Petr Krpata, London +44 20 7767 6561, Jakub Seidler, Prague +420 257 474 432


7

EUR/RON

The NBR keeps talking down the RON with limited success Current spot: 4.64

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ING f'cast Mkt Fwds

After the last meeting, the governor was quite ambiguous and, if

anything, he suggested a slight preference for mild RON

weakness if needed. He argued that the moderate RON

depreciation over the past few years has been positive for the

economy, avoiding a deeper correction. He also emphasised a

general low volatility FX regime. On the other hand, the governor

mentioned that an interest rate differential is ‘in favour of the

RON’ would last and it already helped preserve RON stability.

The NBR governor was dovish, saying that mopping up liquidity at

the 1.00% deposit facility looks ‘sufficient’ right now. The NBR is

trying to balance between higher key rates to keep inflation

expectations anchored and lower transmission of the hikes into

the cost of credit to mitigate the likely political/public pressures.



Ciprian Dascalu, Bucharest +40 31 406 89 90

EUR/HRK

CNB steps in to curb HRK firming, achieves stabilisation Current spot: 7.43

7.10

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ING f'cast Mkt Fwds

The CNB intervened on 4-January buying EUR405.5m at an

average rate of 7.453515 in order to curb HRK firming due to a

large flow. The amount is large by local market standards. Hence,

this led to a stabilisation of the exchange rate.

Croatia has recently elaborated an extensive strategy for

adopting the euro, setting 2020 as a target for ERM-II entry. The

document seems to suggest that the government is comfortable

with the average exchange rate for EURHRK since 2001 of 7.45 as

a likely central parity rate. While this could help concentrate

efforts in reducing the debt to GDP levels, we doubt the country

will manage to meet the 60% debt-to-GDP ratio in three years

from around 83% currently. Source: Bloomberg, ING



EUR/RSD

Heavy two-way management by NBS in tight range Current spot: 118.4

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ING f'cast Mkt Fwds

The NBS tightened its grip on the FX, ignoring IMF

recommendations, as suggested by the increase in frequency of

FX intervention and lower EUR/RSD volatility. The central bank

dismissed a change to a managed floating exchange rate regime.

In its pursuit of Dinarization of the economy, the central bank

recently allowed higher exchange rate flexibility, with RSD firming

and expectations of further appreciation acting as incentives for

deposit Dinarization. The country aims to become an EU member

by 2020, with the Kosovo issue being the only material obstacle -

though it seems that there is strong political will for a

compromise. The RSD benefits from improving external balances

and public finances and we expect the central bank to allow

gradual and steady RSD appreciation.





8

USD/RUB

Starting 2018 on a strong footing despite fears Current spot: 56.55

25.0

35.0

45.0

55.0

65.0

75.0

85.0

25.0

35.0

45.0

55.0

65.0

75.0

85.0


ING f'cast Mkt NDF

The RUB gained 5% vs USD in 2017 on rising oil prices and steady

risk appetite from investors reflecting its strong fundamentals. The

New Year starts at 56.5-57/USD. MinFin FX buying & the sanctions

risk versus a positive C/A seasonality story will drive RUB in 1Q.

The nearly US$70/bbl Brent price will be an extra positive for C/A

surplus in 1Q, which will more than cover the expected increase

in MinFin FX buying under the adjusted approach of calculating

the extra oil & gas revenues. These will provide a cushion against

the slightly higher than usual external debt payments.

The US sanctions risk remains on the table, even though we still

don’t have this in our base-case scenario. Fears of sanctions may

still limit RUB gains, but there are clearly upside risks to our RUB

projections assuming some marginal weakness in 1Q18.



Dmitry Polevoy, Russia +7 495 771 7994

USD/UAH

Facing the same risks as in 2017 Current spot: 28.55

7.0

12.0

17.0

22.0

27.0

32.0

7.0

12.0

17.0

22.0

27.0

32.0


ING f'cast Mkt NDF

28.55/USD vs around 27/USD in early 2017. The UAH has been

punished for the gov’t delays with the key IMF-required reforms,

which has forced external donors to pause further tranches.

These latter factors remain on the table as we move into 2018

with the anti-corruption court, pension reforms and IMF-

compliant fiscal budget and energy tariffs staying as key boxes

needing to be ticked in the near future. The longer the gov’t fails

to succeed, the higher could be investors’/official lenders’

concerns about commitments to the IMF programme and thus

sovereign financial stability.

2018 will be a pre-election year adding risks of populism and

further headwinds to the reform implementation. The UAH pace

fits well with our view of a gradual weakness and risks remain.




USD/KZT

It has been stable over 2017, but has upside in 2018 Current spot: 329.6

140

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420

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Jan10 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18

ING f'cast Mkt NDF

In 2017, the KZT was nearly flat vs USD near 332.3, but lost 12%

vs EUR. The resilience to oil price gains and RUB strengthening

mostly stem from local factors: some re-ignition of devaluation

fears from mid-2017, incl. due to the extension of the sanctions

against Russia, which remains the key trade/economic partner.

KZT fundamentals will remain strong in 2018: GDP growth is seen

near 3%, inflation will likely slowdown closer to 5%, the NBK said

it would keep the real policy rate vs 12M-ahead CPI not above 4%

and the fiscal gap will normalize after a rise in 2017.

The key event recently has been the freezing of US$22bn from

the National Oil Fund to cover the around US$500mn claims to

the Kazakh gov’t. Despite the lawsuit to last over 2018, we see no

risks to the gov’t position, so KZT will likely preserve its appeal.





9

USD/TRY

Inflation to retreat in early 2018 Current spot: 3.75

1.3

1.6

1.9

2.2

2.5

2.8

3.1

3.4

3.7

4.0

4.3

1.3

1.6

1.9

2.2

2.5

2.8

3.1

3.4

3.7

4.0

4.3


ING f'cast Mkt Fwds

In the coming months, easing base effects will continue to

contribute to the recovery in the inflation outlook. However the

magnitude of the fall will likely be shorter and shallower than

envisaged earlier, while concerns about the quality of disinflation

will remain as evidenced by the core at a new peak in the current

inflation series. Given this backdrop along with the 24-month

ahead inflation expectations at the highest since early 2006, the

CBT policy response will remain key for the markets.

Despite sticky core inflation, expected disinflation in the headline

and significant carry should support TRY in the near term.

However, given structural problems that weigh on TRY in the

medium term, bouts of pressure will likely continue. Source: Bloomberg, ING


Muhammet Mercan, Istanbul +90 212 329 0751

USD/ZAR

Too hot to handle Current spot: 12.45

6

8

10

12

14

16

18

6

8

10

12

14

16

18


ING f'cast Mkt Fwds

The ZAR is holding onto the sensational gains witnessed in

December, when Ramaphosa won the bid for the ANC presidency

– sparking speculation of an early exit for President Zuma. At

present, the market seems to be pricing in all the good news –

including perhaps the early departure of Zuma. However, S. Africa

stills faces a potential Moody’s downgrade in February, which

could expel S. African bonds from key indices, such as the WGBI.

In macro terms, growth is expected to remain sluggish near 1.5%

and inflation to bottom out near 4.5% in 1Q18 before trending

higher again. The window for the SARB to cut looks very limited.

We think there is too little risk premium priced into the ZAR. Source: Bloomberg, ING



USD/ILS

Carry on intervening Current spot: 3.40

3.2

3.5

3.8

4.1

3.2

3.5

3.8

4.1


ING f'cast Mkt Fwds

USD/ILS has already hit our end 2018 target of 3.40 and we doubt

this trend needs to reverse. Unsurprisingly the interventionist BoI

has been active, buying $100mn in December and buying ‘large

amounts’ according to the CB governor in January. However, we

only expect the BoI to slow, not reverse this trend. One reason is

that the ILS effective exchange rate is only 5% stronger on the

year – far less than the 11% strength in ILS vs USD.

We doubt the BoI will/can cut rates to deter ILS strength. The

economy is near full employment, GDP should remain steady at

3.5% & the government has just passed an expansionary budget.

Keep watch of what ILS strength does to the CPI trend. Source: Bloomberg, ING




10

LATAM

USD/BRL

Social security reform and Lula in the spotlight Current spot: 3.21

1.4

1.8

2.2

2.6

3.0

3.4

3.8

4.2

4.6

1.4

1.8

2.2

2.6

3.0

3.4

3.8

4.2

4.6


ING f'cast Mkt NDF

External accounts, inflation and activity data remain broadly BRL-

supportive but the outlook for the BRL is biased towards

weakness this year, weighed down by the uncertain outlook for

fiscal consolidation and for presidential elections in October.

On the fiscal front, failure to approve a social security reform next

month, along with the debate over potential changes to the fiscal

framework (the “golden rule”), could trigger further downgrades,

beyond S&P’s move this week (cut to BB-).

On the electoral front, near-term catalysts include the court-

ruling regarding former President Lula’s ability to run in this

year’s election (January 24). The release of election polls should

generate more volatility closer to the ballot, after April. Source: Bloomberg, ING

ING forecasts (NDF) 1M 3.25 (3.23) 3M 3.30 (3.25) 6M 3.45 (3.28) 12M 3.25 (3.35)

Gustavo Rangel, New York +1 646 424 6464

USD/MXN

NAFTA-related headline risk keeps volatility high Current spot: 19.05

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0


ING f'cast Mkt Fwds

NAFTA concerns should continue to drive near-term MXN trends,

with material headline risk surrounding the 6th round of

negotiations (Jan 23-28) in Montreal. This round is critical to

determine whether the parties can move past the considerable

differences that became evident in the 4th-round. Failure to

advance could push the US to issue a notice of withdraw from the

treaty, with a break-up then becoming the base-case scenario.

FX intervention was used to limit FX weakness but Banxico’s

ammunition is insufficient, relative to the size of the market, to

alter medium-term FX dynamics. Banxico should match market

expectations and extend rate hikes in February and April.

Presidential elections (July 2018) should also lend a weakening

bias to the MXN, with left-leaning contender ahead in the polls.




USD/CLP

CLP continues to lead, buoyed by copper Current spot: 603.76

400

450

500

550

600

650

700

750

400

450

500

550

600

650

700

750


ING f'cast Mkt NDF

The CLP continues to stand out as the best-performing currency

in LATAM over the past few months, buoyed by the rally in

copper prices, which could extend into the new year.

Optimism with the election of Sebastian Piñera and confirmation

that a recovery in economic activity is clearly under way have

also contributed to enhance investor interest in CLP assets.

Further gains or, at least, still supportive copper prices this year

could also push CLP toward fresh highs, amid robust trade flows.

Inflation remains below the target but it has bottomed out and

re-entered the targeted range, which should help reduce the risk

that BCCh will re-launch the rate-cutting cycle. Source: Bloomberg, ING

ING forecasts (NDF) 1M 610.00 (604) 3M 615.00 (605) 6M 620.00 (606) 12M 600.00 (638)



11

USD/COP

COP catches-up to oil amid broad USD-weakness Current spot: 2859.85

1600

2000

2400

2800

3200

3600

1600

2000

2400

2800

3200

3600


ING f'cast Mkt Fwds

The COP outperformed in recent weeks, reacting to the weaker

USD and, finally, catching up to the rally in oil prices.

Broad COP fundamentals remain fragile however, as illustrated

by the recent S&P credit rating downgrade. External accounts are

improving very gradually but the chief concern is the fiscal

outlook, which remains uncertain. Commitment to the fiscal rule

will continue to be tested, given lower-than-expected growth and

the upcoming presidential election (May), implying a continued

risk of a downgrade by other credit agencies.

BanRep opted for caution when it paused the easing cycle in

December but additional cuts are likely amid disappointing

economic activity indicators and the gradual decline in inflation. Source: Bloomberg, ING

ING forecasts (NDF) 1M 2850.00 (2866) 3M 2870.00 (2879) 6M 2950.00 (2899) 12M 2900.00 (2934)


USD/PEN

Solid fundamentals but limited room for near-term gains Current spot: 3.22

2.4

2.6

2.8

3.0

3.2

3.4

3.6

2.4

2.6

2.8

3.0

3.2

3.4

3.6


ING f'cast Mkt NDF

The PEN was largely stable over the past month,

underperforming its regional peers amid the rally, as usual.

Peru’s BCRP cut the policy rate four times last year, from 4.25%

to 3.25%, and started off the year with another cut following the

collapse in inflation seen in 4Q (from 2.9% YoY to 1.4% in

December), and renewed concerns about the activity outlook

amid heightened political uncertainty. Further disinflation should

result in at least one more rate cut, to 2.75%, during 1Q.

Despite the (Odebrecht-related) disappointment with GDP

growth, Peru’s fundamentals stand out, thanks to superior

external flows and fiscal sustainability metrics. The PEN broke

through the 3.23 barrier, and should test 3.21 now. Source: Bloomberg, ING



USD/ARS

Monetary policy changes cloud the horizon Current spot: 18.73

3.0

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0


ING f'cast Mkt NDF

The administration’s decision to relax the inflation targets for

2018-19 took investors by surprise and damaged investor

credibility in Argentina’s new inflation-targeting regime.

Fears that the change would trigger excessive rate cuts have

been mitigated by BCRA’s decision to cut the benchmark rate by

less than expected by the market, 75bp vs 100-200. The cautious

guidance was welcomed but upcoming policy decisions will be

carefully monitored, especially after the high December CPI.

Argentina remain highly dependent on FX financing flows. To

maintain investor confidence and limit further FX weakness it

must deliver on the fiscal front and address market concerns

regarding BCRA’s autonomy to conduct monetary policy. Source: Bloomberg, ING




12

Asia

USD/CNY

Yuan strengthening to continue with weaker dollar Current spot: 6.4836

CNY appreciated over 6.5% in 2017 against the USD.

We believe the CNY will continue to strengthen because the

government is still concerned about capital outflows. The

National Council has issued detailed guidelines for outward

corporate investments. For individuals, the regulator caps the

annual overseas ATM withdrawal at CNY 100,000.

The media reported on the central bank setting the counter-

cyclical factor to zero in the daily CNY fixing mechanism. If this is

true it is a move of returning to liberalisation of the exchange

rate mechanism. The currency would face higher volatility from

both internal and external factors. We expect the USDCNY to

appreciate to 6.30 by the end of 2018. Source: Bloomberg, ING

ING forecasts (FWDs) 1M 6.4500 (6.4992) 3M 6.4000 (6.5161) 6M 6.3500 (6.5410) 12M 6.3000 (6.5843)

Iris Pang, Hong Kong +852 2848 8071

USD/HKD

The lower HIBOR triggers possible wiping out liquidity Current spot: 7.8232

HIBOR has come down since the beginning of the year. The

divergence of LIBOR and HIBOR signals ample liquidity, leading

the market to think about whether the HKMA will again exercise

its liquidity mop anytime soon.

We are thinking the same too. Hong Kong’s economy is syncing

more with Mainland China’s economy than with the US. The

linked exchange rate system show signs of misalignment from

the theory that HKD interest rates would change in line with USD

interest rates.

Until the USD/HKD comes close to 7.85 then the HKMA can

defend the peg to buy HKD. But this could be a long wait. Our

end-2018 forecast for USD/HKD is 7.790, supported by strong

inflows into Hong Kong’s asset markets.


ING forecasts (NDFs) 1M 7.8000 (7.8175) 3M 7.8000 (7.8076) 6M 7.7800 (7.7917) 12M 7.7600 (7.7734)


USD/INR

2017 was the best year for INR in a decade Current spot: 63.57

2017 turned out to be the best year for the INR since the 2008

global financial crisis despite some brief weakening pressure

owing to a spike in anxiety about slow growth, rising inflation and

weak public finances.

The INR outlook in 2018 hinges on recovery of the economy from

the dual shocks of de-monetisation and poorly planned tax

reforms. So far so good, at least based on the rallying stock

market and bounce back of INR from the Sep-Nov sell-off.

GDP growth is now gaining upward traction, but inflation is sticky

downward due to higher food and fuel prices. We see little scope

for fiscal consolidation in the FY2018/19 Budget due on 1

February, while the RBI remains in limbo on the monetary policy. Source: Bloomberg, ING


Prakash Sakpal, Singapore +65 6232 6181

5.90

6.10

6.30

6.50

6.70

6.90

7.10

5.90

6.10

6.30

6.50

6.70

6.90

7.10


Mkt Fwds

ING f'cast

7.70

7.72

7.74

7.76

7.78

7.80

7.82

7.84

7.70

7.72

7.74

7.76

7.78

7.80

7.82

7.84


Mkt Fwds

ING f'cast

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0


NDFs

ING f'cast


13

USD/IDR

Surprise strength is unsustainable? Current spot: 13366

The IDR has outperformed recently, appreciating by 1.4% since

end-2017. Foreign ownership of local government bonds rose by

2.9% YTD to 9 January or by around US$1.9bn. Yields of local

government bonds remain one of the highest in Asia. This and

favourable economic fundamentals, entices investors.

Fitch finally upgraded Indonesia’s sovereign rating to BBB in late

December due to more favourable external balances, such as a

narrower current account deficit. FX Reserves had been rising and

ended 2017 at a record US$130bn. Oversubscription of the

US$4bn sovereign bond issue in December shows investor

preference.

BI steady policy supports IDR and local currency bonds. BI should

raise policy rates in 2019 as inflation stays within its target range.


ING forecasts (NDFs) 1M 13450 (13369) 3M 13460 (13416) 6M 13470 (13523) 12M 13490 (13782)

Joey Cuyegkeng, Philippines +63 2479 8855

USD/KRW

Ahead of the pack again Current spot: 1064

The KRW was the best performing Asian currency in 2017, rising

12.8% from the end of 2016.

2018 will likely be another strong year. The economy remains

robust, though growth is overly concentrated in semiconductor

export growth. But government policies to boost welfare receipts

and minimum wages should help support household spending.

Anticipation of further BoK tightening will also lift the KRW, and

gain traction as negative one-offs drop out of the CPI calculation

through the middle of the year. We suspect there will be

considerable foot-dragging by the BoK, which will do its best to

limit, or reduce the pace of further appreciation to what they feel

is justifiable by fundamentals. Source: Bloomberg, ING

ING forecasts (NDFs) 1M 1060 (1063) 3M 1050 (1062) 6M 1030 (1060) 12M 1000 (1056)

Rob Carnell, Singapore +65 6232 6020

USD/MYR

A favourable macro policy backdrop Current spot: 3.9718

The MYR’s 11% appreciation in 2017 against the USD was the

second-best among Asian currencies. The tighter BNM policy bias

will likely sustain the MYR outperformance in 2018.

After a strong run in the first three quarters of 2017 the export-

led manufacturing recovery appears to have taken a breather in

the final quarter of the year. This is consistent with our forecast

of a slower 4Q17 GDP growth rate of 5.5% compared to 6.2% in

the previous quarter, leading to full-year 2017 growth of 5.8%.

Strong GDP growth has put upwards pressure on inflation and

this has prepared markets for BNM monetary policy

normalization earlier than most other Asian central banks. We

forecast two 25bp policy rate hikes in 1Q and 3Q. Source: Bloomberg, ING



7000

8500

10000

11500

13000

14500

16000

7000

8500

10000

11500

13000

14500

16000


NDFs

ING f'cast

950

1000

1050

1100

1150

1200

1250

950

1000

1050

1100

1150

1200

1250


NDFs

ING f'cast

2.70

3.00

3.30

3.60

3.90

4.20

4.50

4.80

2.70

3.00

3.30

3.60

3.90

4.20

4.50

4.80


Mkt Fwds

ING f'cast


14

USD/PHP

Worsening trade deficit to bring PHP on the defensive Current spot: 50.32

Moderate weakness for PHP is likely this year as the strong Asian

currency outlook and net FDI inflows on the back of strong

Philippine economic growth will partially offset the weakening

tug of a worsening trade deficit.

November’s trade deficit of US$3.8bn, the largest on record,

reflects imports of supplies and capital equipment for a vibrant

domestic economy. Export growth remains limited due to a

narrow set of products and neutral base effects. The underlying

drivers spell a further worsening of the trade deficit in 2018.

Overseas worker remittances will decreasingly be able to cover

the deficit.

The Central bank (BSP) is likely to continue to lag any tightening

by the US Fed. We expect it to hike policy rates by 25bp in 2Q and

in 4Q to address second round effects of tax reform.



Joey Cuyegkeng, Philippines +63 2479 8855

USD/SGD

MAS likely to resume tightening in April Current spot: 1.3291

2017 was a strong year for the SGD, finishing in fourth place

regionally, behind the KRW, MYR and THB on annual appreciation

vs the USD of 8.3%.

The relative strength of the SGD is not so apparent in NEER terms,

where the currency rose more like 3% over the 12 months to end

December 2017. Given the guidance from the MAS that the SGD

was to be kept on a zero appreciation path over this period, our

analysis suggests that it is towards the middle of the upper half

of the guidance corridor.

We anticipate the appreciation guidance for the SGD NEER to be

changed to a small appreciation, with no change in the width of

the band, perhaps as soon as the April MAS statement. Source: Bloomberg, ING


Rob Carnell, Singapore +65 6232 6020

USD/TWD

TWD jumps on exporters’ conversion of export receipts Current spot: 29.62

It has become a seasonal pattern that the TWD jumps around the

end of one year to early the following year, as exporters convert

dollar receipts from exports into the local currency. This

strengthening pattern usually ends after the Chinese New Year.

We expect strong global growth and demand for semi-

conductors in 2018, which is in beneficial for Taiwan exports. We

believe that global demand for Taiwan’s exports can balance off

the cost of TWD appreciation for exporters.

The continued inflows into Taiwan’s asset market are expected to

support for TWD. We expect USDTWD to strengthen to 28.80 by

the end of 2018. Source: Bloomberg, ING



40.0

42.0

44.0

46.0

48.0

50.0

52.0

54.0

40.0

42.0

44.0

46.0

48.0

50.0

52.0

54.0


NDFs

ING f'cast

1.10

1.18

1.26

1.34

1.42

1.50

1.10

1.18

1.26

1.34

1.42

1.50


Mkt Fwds

ING f'cast

28.0

29.0

30.0

31.0

32.0

33.0

34.0

35.0

28.0

29.0

30.0

31.0

32.0

33.0

34.0

35.0


NDFs

ING f'cast


15

USD/THB

Is there any interest left in this overpriced currency? Current spot: 31.92

Is there any interest left in this overpriced currency after a robust

10% appreciation in 2017, the third-best in Asia? We are sceptical

mainly because of Thailand’s continued weak economic

fundamentals, apart from persistent large external surplus.

Bank of Thailand policymakers concede that growth has been

below potential despite accelerating to 3.9% in 2017, a pace

likely to hold in 2018. As such, there is no inflationary pressure.

CPI inflation has been below the BoT’s 1-4% target.

With our forecast of no change to the BoT rate policy in 2018 the

only positive for the THB this year will be cyclical USD weakness,

though a repeat of 2017 will be a far cry, in our view. Source: Bloomberg, ING



28.0

30.0

32.0

34.0

36.0

38.0

28.0

30.0

32.0

34.0

36.0

38.0


Mkt Fwds

ING f'cast


16

ING foreign exchange forecasts

EUR cross rates Spot 1M 3M 6M 12M USD cross rates Spot 1M 3M 6M 12M

Developed FX

EUR/USD 1.21 1.20 1.23 1.25 1.30

EUR/JPY 134.9 135.60 138.99 138.75 143.00 USD/JPY 111.22 113 113 111 110

EUR/GBP 0.89 0.88 0.88 0.88 0.85 GBP/USD 1.37 1.36 1.40 1.42 1.53

EUR/CHF 1.18 1.18 1.20 1.22 1.25 USD/CHF 0.97 0.98 0.98 0.98 0.96

EUR/NOK 9.65 9.65 9.60 9.50 9.40 USD/NOK 7.96 8.04 7.80 7.60 7.23

EUR/SEK 9.82 9.60 9.50 9.50 9.50 USD/SEK 8.09 8.00 7.72 7.60 7.31

EUR/DKK 7.449 7.440 7.445 7.450 7.460 USD/DKK 6.14 6.20 6.05 5.96 5.74

EUR/CAD 1.52 1.49 1.53 1.53 1.55 USD/CAD 1.252 1.24 1.24 1.22 1.19

EUR/AUD 1.54 1.54 1.58 1.56 1.53 AUD/USD 0.79 0.78 0.78 0.80 0.85

EUR/NZD 1.68 1.67 1.66 1.64 1.67 NZD/USD 0.72 0.72 0.74 0.76 0.78

EMEA

EUR/PLN 4.17 4.18 4.15 4.14 4.12 USD/PLN 3.43 3.48 3.37 3.31 3.17

EUR/HUF 308.9 310.00 310.00 304.00 298.00 USD/HUF 254.4 258 252 243 229

EUR/CZK 25.53 25.4 25.2 25.0 24.8 USD/CZK 21.03 21.2 20.5 20.0 19.1

EUR/RON 4.64 4.65 4.68 4.70 4.67 USD/RON 3.82 3.88 3.80 3.76 3.59

EUR/HRK 7.43 7.45 7.40 7.30 7.40 USD/HRK 6.13 6.21 6.02 5.84 5.69

EUR/RSD 118.5 119.0 119.0 118.0 117.0 USD/RSD 97.6 99.2 96.7 94.4 90.0

EUR/RUB 68.68 69.0 73.1 73.3 75.4 USD/RUB 56.57 57.5 59.4 58.6 58.0

EUR/UAH 34.55 34.2 34.4 36.3 39.0 USD/UAH 28.54 28.50 28.00 29.00 30.00

EUR/KZT 400.0 396.0 399.8 400.0 403.0 USD/KZT 329.6 330 325 320 310

EUR/TRY 4.56 4.50 4.74 4.81 5.40 USD/TRY 3.75 3.75 3.85 3.85 4.15

EUR/ZAR 15.11 15.3 16.3 16.9 17.6 USD/ZAR 12.44 12.75 13.25 13.50 13.50

EUR/ILS 4.13 4.08 4.12 4.13 4.23 USD/ILS 3.40 3.40 3.35 3.30 3.25

LATAM

EUR/BRL 3.90 3.90 4.06 4.31 4.23 USD/BRL 3.22 3.25 3.30 3.45 3.25

EUR/MXN 23.12 23.2 24.1 25.6 24.4 USD/MXN 19.04 19.30 19.60 20.50 18.80

EUR/CLP 732.18 732 756 775 780 USD/CLP 603.03 610 615 620 600

EUR/ARS 22.69 22.44 23.00 23.75 25.94 USD/ARS 18.69 18.70 18.70 19.00 19.95

EUR/COP 3468.00 3420 3530 3688 3770 USD/COP 2856.57 2850 2870 2950 2900

EUR/PEN 3.91 3.85 3.95 4.00 4.15 USD/PEN 3.22 3.21 3.21 3.20 3.19

Asia

EUR/CNY 7.85 7.74 7.87 7.94 8.19 USD/CNY 6.47 6.45 6.40 6.35 6.30

EUR/HKD 9.50 9.36 9.59 9.73 10.09 USD/HKD 7.82 7.80 7.80 7.78 7.76

EUR/IDR 16175 16140 16556 16838 17537 USD/IDR 13353 13450 13460 13470 13490

EUR/INR 77.17 77.2 80.4 81.0 83.9 USD/INR 63.64 64.30 65.40 64.80 64.50

EUR/KRW 1281.47 1272 1292 1288 1300 USD/KRW 1064.90 1060 1050 1030 1000

EUR/MYR 4.81 4.74 4.82 4.84 4.91 USD/MYR 3.97 3.95 3.92 3.87 3.78

EUR/PHP 61.00 60.8 62.5 64.0 66.0 USD/PHP 50.36 50.7 50.8 51.2 50.8

EUR/SGD 1.61 1.58 1.61 1.60 1.63 USD/SGD 1.33 1.32 1.31 1.28 1.25

EUR/TWD 35.74 35.4 36.0 36.3 37.4 USD/TWD 29.62 29.5 29.3 29.0 28.8

EUR/THB 38.77 38.2 39.0 39.4 40.7 USD/THB 31.93 31.9 31.7 31.5 31.3



17

Disclaimer

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